Question

Caspian Sea Drinks is considering the purchase of a new water filtration system produced by Rube Goldberg Machines. This new equipment, the RGM-7000, will allow Caspian Sea Drinks to expand production. It will cost $12.00 million fully installed and will be fully depreciated over a 20 year life, then removed for no cost. The RGM-7000 will result in additional revenues of $2.69 million per year and increased operating costs of $678,673.00 per year. Caspian Sea Drinks' marginal tax rate is 30.00%. If Caspian Sea Drinks uses a 12.00% discount rate, then the net present value of the RGM-7000 is _____.

Answer 1

Net present value of the RGM-7000 is			$      -1,39,054.60
working:
# 1
	Straight line depreciation	=	(Cost - salvage Value)/Useful Life
		=	(12-0)/20
		=	$                      0.60	million
# 2	Revenue		$     26,90,000.00
	Operating cost		$       6,78,673.00
	Depreciation		$       6,00,000.00
	Profit before tax		$     14,11,327.00
	Tax Expense		$       4,23,398.10
	Net Income		$       9,87,928.90
	Depreciation		$       6,00,000.00
	Operating cash flow		$     15,87,928.90
# 3	Present value of annuity of 1	=	(1-(1+i)^-n)/i		Where,
		=	(1-(1+0.12)^-20)/0.12		i	=	12%
		=	7.469443624		n	=	20
# 4	Present value of annual cash flow	=	Annual cash flow	*	Present value of annuity of 1
		=	$     15,87,928.90	*	7.469444
		=	$ 1,18,60,945.40
# 5	Present value of annual cash flow		$ 1,18,60,945.40
	Initial cost		$ 1,20,00,000.00
	Net Present value		$      -1,39,054.60